Net Free Reserves

What are Net Free Reserves?

Net Free Reserves was one side of a statistic that was (until 2013) delivered in week after week Federal Reserve data showing the difference between the excess reserves banks held on account at the Fed and the liquid reserves the banks had borrowed from the Fed. At the point when this difference (excess reserves - borrowings) was a positive number it intended that as a whole the banking system was on net holding more excess reserves at the Fed than it was borrowing from the Fed.

Figuring out Net Borrowed Reserves

In the past, deposit banks were required to keep a certain amount of reserves close by consistently, in cash or deposits at their Federal Reserve regional branch. Any amount in excess on this base was in effect a short term loan to the Fed in the very sense that bank deposits that consumers and organizations hold in their bank accounts are a short term loan to the bank.

Then again, in the event that banks needed more liquid reserves to meet the base (or other liquidity needs), they could borrow straightforwardly from the Federal Reserve, in its function as lender - after all other options have run out, through the discount window.

The difference between these two amounts (the amount of excess reserves held by banks and the total borrowing from the Fed lending programs) would demonstrate it might be said whether banks were on net lending to or borrowing from the Federal Reserve System. At the point when total excess reserves surpassed total discount window borrowing across all banks, this difference would be net positive and was alluded to as "net free reserves" on the grounds that on net banks were providing more accessible reserves than they were demanding to borrow. In the reverse situation, when banks were borrowing more from the Fed than the total excess reserves they were holding, the number would be negative and was alluded to as "net borrowed reserves".

During times of financial strength, the banking system would hold a lot of reserves to meet their liquidity needs and redemption demands, and less banks would have to resort to backstop borrowing from the Fed's discount window to meet their market obligations. This would lead to net free reserves as discount borrowing fell and excess bank reserves stayed ample. Net free reserves could in this way demonstrate a simple credit environment relative to the demand for loans and interest rates.

Financial Crisis and The Rise of Abundant Reserves

In response to the financial crisis of 2008 and following Great Recession, the Fed interestingly started paying interest to banks on their excess reserves held at the Fed. This gave banks an incentive to hold (and receive interest payments for) more excess reserves, particularly given the extreme levels of risk and uncertainty in lending to the market. Simultaneously, in light of the huge infusions of reserves that the Fed was participating in through its different novel credit facilities and quantitative easing, banks were flooded with new reserves.

Subsequently, excess reserves detonated in the fall of 2008, rapidly surpassing total discount borrowing by many billions, and afterward trillions, of dollars, bringing about phenomenal levels of net free reserves. In succeeding years, this situation continued and established an environment where plentiful excess reserves were the standard, and regularly far exceeded the Fed's discount window lending. Measuring net borrowed or net free reserves turned out to be less valuable as an indicator of stress in the financial system, given the new monetary policy environment, and assortment of this statistic ended in 2013.

Features

• Net free reserves were part of a data series formerly distributed by the Federal Reserve showing the degree of stress in the banking system.
• In the wake of the financial crisis of 2008, net free reserves soar as Fed monetary policy changed.
• From that point forward this statistical series has become less significant as an indicator of financial stress and is not generally distributed.